Economics is fundamentally unscientific. The economic crisis has speeded the shift of power to emergent economies. In Britain and the USA the theory of 'rational markets' removed controls from the finance sector, and things can still get yet worse. Read my book, No Confidence: The Brexit Vote and Economics - http://amzn.eu/ayGznkp

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Wednesday, 6 February 2013

I have been offline for a month, as I got on with crucial jobs including a last attempt to re-present my basic ideas for the general interest. If that fails, I think I will abandon more than four decades of research and analysis.

Meanwhile, in the hope of belated success, I continue to comment on the matters of the day; seen from the perspective that my researches have endowed me with.

Under the Accounting Standard FRS 102 - supposedly bang-up-to-date and state-of-the-art - the powers that be have promulgated the crazy assertion that 'Financial Instruments' should be accounted for, especially in corporate balance sheets, at 'Fair Value'.

Neither of those terms has any substantial meaning.

The term fair has prominently been used in the past 24 hours by advocates of the idea that homosexual people should be allowed to marry: at this stage, only in twos. Although an Anglican, I have no fundamental objection to people of any sexual orientation [or of none] taking steps to protect their reputations and to safeguard their assets on a basis of legal and social equality with other people. But I do find completely silly the notion that a legally recognised relationship of two people can be called a 'marriage' in any sense other than that which has been traditional throughout the world for thousands of years. Changing the lexicon to be 'fair' to people who want to annexe the words 'marriage' and 'wedding' to events that simply are not what the words mean is an abuse of lawmaking and an affront to common sense. To use 'fairness' as the motivation for a mutilation of language further devalues the already debased concept of 'fairness:' that has come to mean "whatever will pander to the next demand upon the political system from some interest group". Each such concession to unreason tends in the end to make society ungovernable and the implementation of the plethora of conflicting demand unaffordable.

As to value, the more that is written around the term the clearer it becomes that it is even more meaningless than fair. Millions of times quoted is the adage condemning an individual who 'knows the price of everything, and the value of nothing'. In this all-too-real world prices matter to almost everybody all the time: as prices increase faster than wages and pensions and benefits received by the majority of the population, so living standards decline. This inevitable aspect of the forced move that society must make, from the fake affluence of the pre-credit-crunch era to a materially affordable future general standard of living, is set to intensify as the failure of the coalition government's 'austerity' policy becomes more blatant. People will be forced to decide what they wish to continue to consume, and [at least by default] what they are consequently prepared to drop from their shopping baskets. Some commentator may take the view that the resulting preferences reveal the relative value that different people apply to the items that have been in their pattern of consumption, but that simply means 'relative preference' and has no scientifically measurable or verifiable content.

The only possible meanings of 'Fair Value' that can responsibly be used to tell a firm or an individual what an asset is 'worth'are:
a] the current market price of the instrument;
b] a notional price [not being the price that exists momentarily in a specific trading arena], which is accepted by the current owners and by their actual and potential counter-parties as being an accurate average of the prices that were struck on a recent succession of trading days. Thus any exceptional leap or dip in the price of the asset would not invalidate the valuation; on the assumption that exceptional price movements will be corrected in a very short period.

Either of these concepts is more accurately expressed in the words just given than in the ephemeral term value. Far from meaning something absolute, value means nothing-in-particular. For centuries, Political Economists and Economists have pursued the notion that there should be something more meaningful than price, in disclosing how humans respond to an intrinsic quality of goods and of services, which causes the commodities to be priced higher or lower relative to the material costs of their production or provision: and this quality is called value. No such thing exists. Defining the components of price, and how the prices of different commodities and services deviate more or less from equality with their measured costs of production will be the subject of my next effusion.

Friday, 4 January 2013

The start of 2013 has brought more mild, cloudy and [here in the Peak District] drizzly weather. Just a dawn on which to take the BBC's TODAY Programme with the morning tea.
One of several depressing items was a discussion by Economists about the phenomenon that is thrown up by British economic statistics. Employment is at its highest level in recent decades: but perceived productivity has declined and the national product is not increasing significantly [indeed, it may just have 'flatlined' over the whole of 2012].
Wages are increasing overall at less than the government's indexed figure for 'inflation', and a high percentage of the workforce are attending their workplaces for less than the 35 hours a week that sensibly can be classified as full-time employment. Some firms have put reliable, trained employees on 'short time' to keep them on-side in case business improves; but the majority of part-timers are engaged on that basis. Many of the part-timers receive only the statutory minimum wage per hour; and for the majority there is no pension provision. The new catch-all pensions legislation will draw many such people into basic schemes: which implies that a further deduction will be taken from their wages and put into a pot with a promised yield in retirement that will be derisorily small. The loss of even a couple of percent of an exiguous wage will have a depressing effect on overall 'cansumer demand' in the economy, when multiplied by millions of affected individuals; but the sums gathered for investment by the pension providers will not be sufficient to create investments that will absorb significant numbers of the unemployed into new jobs and thus increase demand through their enhanced spending.
Wage-earners are still buying imports on an heroic scale: everything from East African fruit, veg and flowers to web using technology from the Far East.
Any increase in the real wages of empoyed people, or in the number of employed people, would most likely increase the deficit on the balance of payments: so in a seriously depressing sense the government is contributing to its target of deficit reduction by keeping a pretty tight cap on incomes.

This is the context in which the Economists this morning discussed these recent economic data. One of them had recently publiched a Paper with a mind-blowingly complex title, replete with pseudo-scientific terminology adding up to zero usefulness. They spoke of productivity as if there was no qualitative difference between the various categories of output: as if it did not matter what was the level of notional value-added by different firms' plant. This is in line with the textbook assumption that all output is of widgets: it is almost impossible for non-Economists to understand the primitivism of this lack of thinking.

To say that "the productivity of the British economy is declining" is to say that products and services are sold for a declining number of money-units per unit of output. This means that prices of goods made in British factories are falling. This does not necessarily mean that fewer units of output are being sold; it can equally mean that goods are being sold for lower 'factory gate prices'. How could such a thing occur?
A] It could mean that global competition is forcing factory owners to lower the prices at which they sell their branded goods Or
B] it could mean that firms have been bought by foreign owners who buy the output as being part-processed [though it is physically complete] and then ship it to the export markets where it will be sold, and the magic transformation by which a pile of coats or a cartoon feature film becomes a branded commodity [in the terms of my own analysis, a quon] takes place outside the UK - it may even notionally be reinported to the UK as a quon - so that the final, most significant 'addition of value' is ascribed not to the UK factory but to the corporate owner's success in transfer pricing the product offshore. Or
C] it could mean that rising wages and other industrial costs in China are making it viable to start or restart or increase the output of basic industrial products in the UK; which only have modest price tags such that an increasing proportion of British factory output is of modestly priced goods [what I describe as marcoms].

All those three possibilities point to a sharp decline in the profitability of British industry, and in the taxes that firms can pay to the state, and the level of wages they can pay to employees: all of which presage declining investment, declining public and social services, and diminishing real wages.

The policy options that are being presented to the government, and to the opposition, and to the Bank of England display the economic ignorance of Economists.

Hard times are ahead of us: and mitigation will only become feasible when the proven principles of Political Economy are reinstated as the basis of policy.

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About Me

I have had a very fortunate life, in that I have been able to study the economy and Economics for more than forty years. I taught Economics, the History of Economic Thought and some Economic History at University level for over twenty years; I was CEO of an international professional Institute in financial services for more than a decade; served as head of a large Business School and have been Pro-Vice-Chancellor of a major university; and I have lectured and examined all over the world. My introductory text on insurance was translated into fourteen languages and my writings over a wide range of topics have been available worldwide.

Throughout these years I have quietly challenged the normative assumptions that underlie academic Economics; but for decades I recognised that the hegemony of dogma was so impenetrable that any frontal assault on the self-styled ‘profession’ would be brushed aside by the professoriate that had been appointed in a pyramid of patronage. Now – through the credit crunch and the even more grave sovereign debt crisis – it is very widely recognised that Economics is a failed subject: it fails to provide any adequate analysis of the situation or any new programme for moving the economy forward. The time has come for the world to understand how fundamental the failings of Economics are.

Fortunately we can begin to move forward in understanding by restating principles that were developed before Economics was set out in its modern form in the eighteen-seventies. A sound understanding of the economy begins in the recognition that all decisions and actions in the economy are taken by human individuals, acting on their own or as the agents of corporate persons [companies, registered charities etc] or as servants of international sovereign persons that are known as states [and their governments, local authorities and state agencies].

Persons are not impotent incidents in markets: markets are the creations of persons and any market can be abused or upset by persons with unusual ambition, drive, inspiration or dishonesty. This approach is followed in my simple little book, Personal Political Economy: follow the link.

In this blog I make comments on people and events from the perspective that is set out in the book: and I will not hesitate to repudiate any portion of the book – or any blog – that is invalidated by emergent reality.I thrive on criticism, and welcome it.